For fifth straight year, investors exit stock funds

BOSTON (AP) – The stock market ended up going nowhere in 2011 despite a bumpy ride, and investors continued to hit the exits. For the fifth year running, they withdrew more cash from stock mutual funds than they put in.

Bond funds continued to attract new cash. It reflects that investors are risk-averse after the Standard & Poor’s 500 index produced an average annual loss of one percent in the last decade, including dividend income. Volatility remains a big fear, with the 2008 financial crisis still a fresh memory.

“People look at stock returns, and see they have been poor for the past decade, and they don’t want to play the game anymore,” said David Santschi, executive vice president with TrimTabs Investment Research.

In 2011, the S&P 500 index ended up almost exactly where it started the year, although it returned 2.1 percent factoring in dividends.

It was a market that investors continued to shun. They withdrew a net $85 billion from US stock funds last year, industry consultant Strategic Insight said on Friday. The string of annual net withdrawals extends to 2007. Over that stretch, investors have removed a net total of $328 billion.

Bond funds have attracted about twice that much in new cash in just the past three years, including last year’s net deposits of about $116 billion.

Before the financial crisis of 2008, it was common for stock funds to take in twice as much new cash as bond funds in any given month. That pattern briefly returned a year ago, when stock fund coffers grew for four consecutive months to start 2011.

But that streak ended in May, and worries about slower economic growth and the European debt crisis mounted over the summer and fall. Economic news turned more positive in December, but it wasn’t enough get investors back into stock funds.

Strategic Insight said investors withdrew a net $24 billion from US stock funds in December, the eighth consecutive month with more money flowing out than in. Bond funds attracted $13 billion in new cash in December.

Investors also retreated from funds investing in foreign stocks. Net withdrawals from those funds totaled $11 billion in December. Still, foreign stock funds ended the year with net deposits of $34 billion, reflecting expectations that China and other emerging markets such as India and Brazil continue to have good long-term prospects.

Americans’ recent caution about money extends beyond their investment decisions. Over the first 11 months of last year, net deposits into checking and savings accounts were about eight times as big as the net total flowing into stock and bond mutual funds and exchange-traded funds, TrimTabs said on Friday.

“The economy isn’t likely to get off to the races as long as investors are stuffing most of their money under the mattress,” TrimTabs’ Santschi said.

Since 2008, investors have been pulling money from stock funds even during periods when the market was recovering. Aversion to stocks has persisted despite low interest rates, which the Federal Reserve is maintaining as an economic stimulus. Those rates have encouraged borrowing, but make it nearly impossible to generate decent income from bank accounts and lower-risk segments of the bond market.